Freddie Mac Q4 2007 Earnings Call Transcript

Feb.28.08 | About: Freddie Mac (FMCC)

Freddie Mac (FRE) Q4 2007 Earnings Call February 28, 2008 1:00 PM ET

Executives

Ed Golding – SVP IR

Dick Syron – Chairman, CEO

Patty Cook – CBO

Buddy Piszel – CFO

Analysts

Kenneth Posner – Morgan Stanley

Analyst for Paul Miller – Friedman, Billings, Ramsey

David Hochstim – Bear Stearns

Brad Ball – Citi

Howard Shapiro – FPK

Eric Wasserstrom – UBS

Moshe Orenbuch – Credit Suisse

Bruce Harting – Lehman Brothers

Robert Lacoursiere – Banc of America Securities

Fred Cannon – KBW

Thomas Mitchell – Miller Tabak

Operator

Ladies and gentlemen thank you for standing by and welcome to the Freddie Mac fourth quarter and full year 2007 financial results conference call. For the conference, all of the participant lines will be in a listen only mode, however there will be an opportunity for your question. If you’d like to ask a question today, please press the star then one on your touchtone phone. If you should require any assistance please press star then zero and an operator will assist you offline. As a reminder, today’s call is being recorded. At this point I’d like to turn the conference now to the Senior Vice President of Investor Relations, Mr. Ed. Golding, please go ahead sir.

Ed Golding

Thank you John, good afternoon and welcome to our investor presentation and conference call where we present to you our financial results for the fourth quarter and full year 2007. Speaking today are Freddie Mac’s Chairman and Chief Executive Officer Dick Syron, our Chief Business Officer Patty Cook and our Chief Financial Officer Buddy Piszel. Before we begin let me make two important points. First we have posted on our website a slide presentation and four tables which include additional details on our results. You may want to have these available as Buddy walks through the numbers.

We have also released additional information on several significant topics including house price depreciation, our ABS portfolio and a description of our new financial metric, adjusted operating income. We understand that it’s a bit overwhelming to try to digest all of this in one day, so today we’re covering the most relevant topics and will provide more detail at our March 12 investor analyst day in New York. Second, please note that today we may make certain forward looking statements regarding our business results. These statements are based upon a set of judgments, estimates and assumptions about our key business drivers and other factors. Changes in these factors could cause our actual results to vary materially from our expectations. You’ll find a discussion of these factors in today’s information statement and 2007 annual report which is also posted on our website.

We strongly encourage you to review those factors carefully. One final note, we’d like as many people as possible to be able to ask a question. Therefore, if you would please limit yourself to one question and a follow up, I’d be grateful. Time permitting, we will come back for a second round. Thanks and now let me introduce our Chairman and CEO, Dick Syron.

Dick Syron

Thank you Ed and thank all of you for joining us this afternoon. This is a momentous time for Freddie Mac in two dimensions, one is good and one is bad. After many years of effort, we are finally delivering timely financial reports. The entire Freddie organization but especially Buddy Piszel deserve great credit for that. Unfortunately the financials we’re delivering are far from pretty. As we indicated in our call in November, continuing adverse trends in house prices, mortgage credit and fixed income markets contributed to significant losses in the fourth quarter. For the fourth quarter and full year, Freddie Mac recorded a net loss of $2.5 billion and $3.1 billion respectively.

I’ll ask Buddy to take you through these results in detail in a couple of minutes, but first I want to make a few general points on our position. First, on capital, no one could have lived for the past six months in the financial markets and missed the fact that access to capital is absolutely crucial in investor’s minds. Freddie Mac recognized our need to address capital in the fourth quarter of 2007 and took a positive affirmative step to issue $6 billion in deferred stock. As it turned out, we were the first in a long parade of companies to do so. Giving effect to the impact of adopting the fair value option at the beginning of 08, our capital stood at approximately $39 billion with an estimated surplus of about $4.5 billion over the 30% mandatory surplus target.

This is about where we expected to be at the point following our preferred deal last year. At the current level in surplus, management believes that we have sufficient capital to provide for modest growth in our business and to weather the downturn in the absence of significant further disruptions. I should note that we are currently assessing how we plan to address the increase in uniforming loan limits that was included in the fiscal stimulus package. We will keep the market appraised of our intentions in this area as we formalize our plans which will depend in part on how many MSAs are designated by HUD. But make no mistake, we will be there to meet the responsibilities Congress has assigned us.

In addition to being timely, Freddie has taken a big step forward in enhancing the presentation of our financial results. As we have committed in the past and many of you have asked, we will continue to improve our financial reporting package by providing expanded disclosures and updating existing data with new information. Both Patty and Buddy will address these items in greater detail but we hope today’s release of new information about our ABS portfolio and business segment information under our adjusted operating income metric will be useful to investors. Third, as we disclosed in our release we have made significant progress towards fixing our internal control methods.

To summarize, as of today we’re remediated three of the identified six material witnesses and we’ve implemented controls which we believe will be sufficient to remediate the remaining three items in the near future. Along with returning to timely reporting, this step is crucial for the purpose of becoming an SEC registrant, a process we expect to initiate in the first half of this year.

Finally, we have taken tangible steps to improve the profitability of our new guaranty business by implementing several pricing increases and adjusting things more on a price to risk basis in our single family business as well as tightening our credit standards. In addition, we have taken steps to mitigate the impact of volatility on our financial results and on our capital levels. While these actions have taken a great deal of time and effort, our release today should underscore that Freddie Mac is a company that places a high value in keeping its commitments.

Achieving these goals was crucial to the ongoing execution of our mission and success of our company for our shareholders. While the financial impacts of market volatility and credit deterioration have made our recent financial results suffer, real improvements in our company’s infrastructure and profitability of new business makes me very optimistic about our future prospects when we emerge from the current downturn. Patty and Buddy will now take you through these items in more detail and I’ll turn things over to Patty.

Patty Cook

Thanks Dick. The fourth quarter was clearly unprecedented from a housing and capital markets perspective and as a result our credit guaranty and investment businesses were significantly impacted by the turmoil. In my comments I will address the challenges we faced in the fourth quarter and the actions we took to improve the go forward outlook. Although difficult to see in our financial results, the long term prospects for both of our businesses are bright. There are six themes that I want to highlight that address these conflicting observations.

First, house prices declined significantly in the fourth quarter at an estimated 4-5% valuated rate on our portfolio across the US as a whole. Second, spreads on mortgage assets widened significantly in the fourth quarter and expectations for future credit losses in our guaranty business increased, producing significant losses. However, the majority of these mark to market losses are not expected to be realized. Third, Freddie Mac and GSE share as a whole continued to gain momentum in the single family and the multi family markets during the fourth quarter.

Fourth, Freddie Mac continued to tighten credit, raise fees and widen the spreads in our single family and multi family businesses. Fifth, while the 2007 single family book is clearly worse than the 2006 book, it appears that beginning late in the fourth quarter, the underlying credit quality of new single family mortgage originations began to improve. Finally, following our preferred issue in December and the recent announcement by OFHEO that the portfolio cap will no longer be in place as of March 1st, we continue to manage our capital prudently to provide for reasonable growth in our businesses as well as to maintain capital sufficiency to the current credit downturn. So first, the decline in house prices in the fourth quarter and the impact on credit.

The large decline in house prices in the fourth quarter has led us to increase the expected decline in our medium house prices pass to approximately 15% peak to trough causing us to increase our expectations for expected default cost. While the relationship between house prices and defaults is clear, the forecast for expected defaults is not precise. This is particularly true in this environment as the rate of decline nationally is without recent precedent and the lack of correlation between unemployment and declining house prices is also unusual. Recognizing the challenges and forecasting defaults and losses, our best estimate is that the net present value of total expected default cost will range between $10-$15 billion given these assumptions.

This compared to our prior guidance of $10-$12 billion. This estimate of expected default costs is about half of the GO on our fair value balance sheet. To realize default costs of this magnitude, you would need 3.5% defaults with 25% severities. To put this into historical perspective, our worst book in the early 90’s realized about 2.5% defaults. While house prices nationally may decline further this time, the unemployment picture is much better. It is also worth noting that our current serious delinquencies are 65 basis points, well below a level needed to reach 3.5% defaults and well below the level of other prime market benchmarks.

Next, fair value, fair value declined significantly during the fourth quarter, about $17 billion after tax bringing the year to date decline to approximately $25 billion after tax. This markdown is split about evenly between the guaranty business and the investment business. I will address both. While the credit quality of our retained portfolio remains very high with 57% in agency [curities] and 33% in non agency securities of which 96% is currently triple A rated, spreads widened dramatically. This resulted in a pretax mark to market loss of $14 billion during the quarter. Almost $10 billion of which was associated with our ABS portfolio which sustained a 200 basis point widening of spreads.

During 2007, the ABS portfolio widened from a spread of 28 basis points to 335 basis points. However, given the structure of these securities and the resulting subordination, we do not believe any significant realized losses are likely and therefore have not recorded any impairments. Similarly, for the agency and [CMBF] components of the portfolio, we do not expect to realize these OAF losses. Since we do not expect to realize any meaningful losses, the reversal of these marks will over time emerge as higher course spread income and fair value. During 2007, the overall spread on the retained portfolio therefore increased from 27 basis points to 104.

In addition, the wider spreads are also creating expanded purchase opportunities in the agency mortgage securities market. Let me just remind you that all of these prices that we use for the portfolio are reflective of third party marks obtained from pricing services on the street. I want to address the ABS portfolio in a little more detail. The non agency ABSs were critical to our effort to meet our affordable lending objectives and allowed us to invest in non prime markets with substantial credit enhancements.

Despite the continued deterioration of the housing market and increases in non prime delinquencies, we remained comfortable with our risk position on these assets. In order to provide a better understanding of how we come to this view, we have posted an extensive write up of the ABS portfolio on the website with this release. Remember, all of the bonds held in this portfolio are plain pass through securities and contain no CDO exposure. A couple of quick points, look at slide 8, the circled items show the results of three stress test scenarios we run on the subprime portfolio.

The results show that a 50% default 50% severity experience, our projected losses on that position are less than $1 million. We even included two more onerous scenarios, not because we think they are likely but to show that even in these extreme cases, anticipated losses are far below the severe market estimates we have seen. Let’s move to the decline in fair value of the guaranty business. The GC business was affected by declining house prices which resulted in the current loan to value ratio of our portfolio increasing as delinquency rates increased and mortgage related credit spreads widened further. The combination of these factors led to an expectation of higher expected default costs and significantly higher risk premiums.

The result is a decline in the fair value of the GC business of about $9 billion for the quarter and $13 billion for the year after tax. About half of the increase is a function of higher expected default costs. The other is the result of market illiquidity and higher risk premium which we capture in our third party mark to market process. Said another way, if we were relying solely on our own models to price our GO, our mark to market change for the year would have been about half as much.

Remember in the fourth quarter of 2005, we moved to third party pricing for this portfolio and as a result, are picking up the risk premiums in the same manner as we do in the retained portfolio. If our expectations for default costs are close to what we ultimately realize, the portion of the mark to market loss associated with wider spreads will come back to fair value. This volatility in fair value raises the question of its usefulness as an earnings measure.

We believe fair value is a useful measure for evaluating the business over longer time periods. It is not as useful over short time periods when spread volatility can dwarf the economic spread being earned in both businesses. This is particularly true for Freddie Mac as we have both the intent and capability to hold to maturity. As a result, we believe the additional non GAAP measure of adjusted operating income will help in evaluating the business. Now let’s move on to the brighter portion of my comments, GSE share. During the fourth quarter as other mortgage investors pulled back from the market, Freddie Mac continued to support our customer’s liquidity needs and provide a needed stability to the single family and multifamily mortgage market.

As a result, volumes in the multifamily business doubled for the year and the growth rate of the single family business rose to 18%, significantly outpacing the growth of MBO. Single family GSE share also increased to approximately 72% in January 2008 from about 40% in 2006. We would expect the GSE share to remain high in 2008. While this growth bodes well for our long term prospects, it does entail some near term risk due to the adverse credit environment. However, in this environment we have improved fees and tightened our credit box which is my next theme. We have made four changes to our prices and credit guidelines beginning in August of 2007.

Our most recent price increase was announced for implementation June 1st. The intention of the changes was to address the increase in the riskiest component of our deliveries by introducing risk based pricing and by tightening credit terms. We believe these actions will have a material impact on returns in this business. In fact, we have begun to see the improvement in the credit quality of our deliveries in the last couple of months. Some highlights of the changes include, we reduced the maximum TLTV to 97% on all standard and affordable products with FICOs below 700.

We eliminated NINA NIVA no ratio loans in October and we introduced new risk based pricing fees in November effective in March. For example, loans with LTVs greater than 70% have an additional fee determined by FICO ranging from 75-200 basis points. This is the first time Freddie Mac has initiated changes of this magnitude. The combined effect of these prices actions means that going forward, Freddie Mac will benefit from significantly better pricing that should approach the mid 30’s in basis points for new guarantees in the second quarter. This projected increase is dependent on the mix of business that is received.

Nonetheless, it remains true that the overall credit quality of our 2007 deliveries was worse than 2006 and the results of the GSE share of the overall market increasing primarily through the delivery of riskier loans. We believe this trend peaked in November. While it is too early to claim victory, we have seen a meaningful improvement in the quality of our deliveries. We have observed the improvement in our underlying loan quality by examining improvements in the worth quintile where the majority of the expected losses exist.

Examples of these changes include, in January, loans with total LTVs greater than 90% had declined 13% from the peak. FICOs less than 620 declined 5 and low and no doc loans declined 14. Lastly, we must continue to manage capital responsibly as we consider various growth opportunities, particularly without the portfolio cap. We expect the single family and multi family businesses to grow in 2008 as the market’s need for liquidity remains. We are also taking steps to help maximize the returns in the retained portfolio beginning with the redeployment of our monthly runoff. Net increases in the retained portfolio will be weighed against the availability o regulatory capital in the market environment.

We always look for opportunities to increase shareholder value through highly profitable investments and believe that we can manage our capital position to execute on those opportunities. So there you have it. From a business perspective, even in this difficult business environment, with house prices declining, expected default cost rising and risk premiums widening, we are increasingly able to improve the franchise value of the firm. We continue to benefit from a relatively strong credit risk position and market position. Our ABS portfolio has continued to demonstrate its resiliency to underlying subprime losses. We have taken steps to continue our mission and improve our business and we are experiencing pricing power and credit standard tightening in our GC and multifamily businesses. All of these business drivers will contribute to improved returns over the long term. With that, I’ll turn it over to Buddy.

Buddy Piszel

Thanks Patty and good afternoon everyone. As Dick said, we intend to be a company that does what it says and from the finance side we’ve begun to demonstrate that in 2007. We’ve improved our GAAP reporting and introduced our new non GAAP framework. We’ve sunset the bulk of our control issues, we significantly expanded our disclosures, we don’t have impairments on the ABS portfolio and even with all the additional work, we’ve returned to timely reporting. Lastly, our capital is about where we expected it following our preferred issuance in December.

That’s a lot of progress in one year and we’ll continue down this track in 2008. We’ll continue to accelerate our financial reporting timelines, we’ll complete the strengthening of our control environment and we’ll become an SEC registrant. We’ve said before that we aim to be a leader in disclosure and transparency and we’ve taken a number of actions today to continue our delivery on that commitment. We posted an enormous amount of information this morning with our release. Specifically we provided new information on the house price [path], our ABS portfolio and our new adjusted operating income metric and results.

Another important piece of our story is the evaluation of our counter party exposures with a focus on the MI companies and the mono line insurers. We intend to publish an analysis of this risk prior to our investor day and then discuss all these materials at the investor meeting on March 12th. Given the intense focus on capital and the significance of the changes we’ve made, I will emphasize our GAAP results today and remember all current and historical GAAP numbers presented reflect our accounting changes. The high level GAAP takeaways from our release are one, net loss for the quarter was $2.45 billion, roughly double the loss of the third quarter.

Two, adverse long term interest rates and credit spreads experienced in the third quarter actually worsened through year end. That produced greater mark to market effects than we had estimated on our third quarter call. Three, as we expected, we had not seen any impairments on our ABS portfolio.

Four, our provision for credit losses remained substantial and lastly, given all that, as of the first of the year, Freddie Mac had an estimated core capital level of $38.9 billion, that’s $12.4 billion greater than our regulatory minimum. So we remained well capitalized for our risks. So let’s start with capital and if you’ll please turn to slide 2. Line 7 at the bottom of the slide shows that as of January 1st, 2008, Freddie Mac had an estimated core capital level of $38.9 billion which translates into an excess of about $4.5 billion over the 30% mandatory target capital surplus requirement.

As you can see we did benefit from the adoption of FAS 159 to fair value option. While we originally estimated that FAS 159 adoption would have little to no impact on our capital position, the significant interest rate move we experienced in late 2007 created a onetime adoption adjustment upward of $1 billion in our core capital. So all in all, our capital position at 1/1/08 is about where we expected it to be following our preferred issue. That gives us sufficient capital to provide for modest growth in our core businesses and certainly any relief on the 30% will give us greater flexibility.

Now let me take you briefly through slide 3 and that shows the effects of our accounting policy changes and then we’ll turn our attention to our GAAP results. As we discussed from early 2007, while our previous account policies are acceptable under GAAP, many investors struggle to understand our business results on an absolute basis and also struggled with our comparability to Fannie. Slide 3 displays the effects of changing two accounting policies for our guaranty business that should improve both these issues. The main revenue impact from changing the policy is that we now report our guarantees in one line, irrespective of whether the credit risk is on or off balance sheet. To make that change from our previously reported numbers, we transferred guaranty fee revenues out of net interest income and into the management and guaranty income line shown on lines 1 and 2 respectively.

On the credit side, two big changes. We no longer record mark to market credit adjustments to the on balance sheet Freddie securities. The elimination of that mark is shown on line 3. And instead, we will provide for incurred losses for these holdings through our FAS 5 provision, this increased provision is shown on line 7. While these changes reduce the magnitude of our year to date third quarter loss, they did not increase our capital as of September 30th because 2006 and prior year’s net income were cumulatively adjusted downward by approximately the same amount. Turning to slide 4, let’s go through our GAAP results.

Revenues from our investment and guaranty activity shown on lines 1 and 2 were essentially consistent with those of the third quarter. Let me take you quickly through the major mark to market items behind lines 3 and line 8 and describe our exposure to future volatility. Line 3 which includes most of our interest rate related marks worsened in the fourth quarter as a 51 basis point decline in long term interest rates reduced net mark to market loss of $2.3 billion on our portfolio of derivatives. This also caused a reduction in the fair value of our guaranty asset of $843 million. For the full year, these un-economic marks reduced our GAAP results by over $4 billion pretax or close to $2.6 billion after tax. For this exposure going forward we’ve taken two steps.

First, as of the first of the year, we implemented FAS 159 fair value option for a sub segment of our securities portfolio. By doing this going forward, gains and losses experienced in the GA will be significantly offset by market value changes in the mortgage portfolio. Also, we are reinitiating hedge accounting to begin associating interest rate hedges with underlying debt and the assets they economically hedge. As we continue to implement this change throughout 2008, the amount of derivatives portfolio that is subject to mark to market through our income statement will decline, somewhat reducing the potential for these disruptive marks.

Turning to credit marks included in line 8, in the fourth quarter mark to market items increased as continued widening in the credit market spreads on new mortgage securitizations produced a day one loss of $1.3 billion and a mark to market loss of $736 million on the delinquent loans we purchased out of securities. For these two items, we’ve taken several steps. First, as we previously disclosed, starting December 1st we no longer automatically purchase loans out of securities that are 120 days delinquent. As a result, December delinquent loan purchases fell to $4 million in UPB, that compares to October and November purchases of more than $1 billion per month. So mark to market losses are significantly lower future purchases will decrease accordingly. However, I should reemphasize, these estimates for incurred credit losses on these delinquent loans are already included in our loan loss provision.

The second change we made is one that Patty spoke to, which is to tighten underwriting and improve our guaranty fees. The fee increases take effect in March and in June so as they leg in we will get some relief on the day one losses. However, these actions are not enough to overcome today’s extremely wide market, not modeled base credit spreads. So we continue to explore other solutions to this issue. Based on all these actions, we go into 2008 with reduced volatility in our GAAP earnings which allows us to better manage our capital levels.

Finally I want to draw your attention to line 7, credit related expenses and this is our credit provision. While this amount actually declined from the third quarter of 07 to the fourth quarter of 07, it’s important to remember that the third quarter provision amount was boosted by changes we made in our reserve practices specifically related to the 06 and the 07 book years. As a result the change from the third quarter to the fourth quarter should not be viewed as a provision that has turned or is trending downward. At year end, our credit reserve totaled $2.8 billion which covers approximately the next year and a half of our disclosed expected charge offs.

We anticipate that the provision for credit losses will remain high in comparison to recent periods as the US housing market remains under pressure. If you would now turn to slide 5, earlier Patty walked you through the updates on our credit guaranteed portfolio characteristics and our views of house price pass, expected defaults and severities. All of these have worsened from third quarter to fourth quarter and accordingly our overall expected credit losses have gone up. The same factors that influenced this increase drove increases in our expected charge offs in 2008 and 2009 and our fourth quarter provision. On slide 5 you can see that our estimated credit losses from 08 and 09 are now 12 and 14 basis points respectively which combined have increased by $1.5 billion from our third quarter disclosure.

So in summary, fourth quarter and full year GAAP results continued to bear a lot of play from credit expenses and mark to market items. On the positive side, our capital is intact and we’ve taken a number of important steps to relieve some of the pressure in 08. While we’ve tried to give you some idea for how these items will move in 08, we’ll give you a fuller treatment to 2008 on our investor day in March. And that completes my discussion on the fourth quarter and full year GAAP results. While we’ve included the adjusted operating results in our press release, ISS and the web materials, because they’re so new and in the interest of getting to your questions, we won’t cover them today.

Leave it to say we’re very pleased to introduce what we believe is a much more understandable framework for measuring our business performance and we’ll cover AOI in detail at our investor day. So in closing, you put all that together and we believe that we have an excellent long term franchise and we are all proud and committed to deliver on that future. By year end, from a financial standpoint, we’ll be as well run as any financial institution out there and you have our commitment on that. And with that, let me return things to Dick.

Dick Syron

Thanks Buddy, you’ve listened a long time to us so I’ll be hopefully quite brief. First, no one knows how long the housing downturn will be, we’ve been pretty cautious on our expectations but clearly our sector is in a rough period that for anyone that’s likely on this call is totally unprecedented in our lifetimes. Given this tough environment, we’ve done a number of what we think are necessary and appropriate things. We took early and decisive steps to raise capital, hopefully in a common shareholder friendly way. We adjusted our pricing and credit requirements to align more closely with risk.

Importantly, we’ve finally become timely in our financial reporting and we’re increasing the transparency, usefulness and comparability with other financial institutions. We’ve grown volume and market share in the guaranty business as the market has begun to come back to us. And now our regulator with whom we have a mutually respectful and professional relationship has announced that they’ll be lifting our portfolio cap as of March 1st and will be considering the approach they’re going to take to the 30% surplus over time. I think maybe most importantly, we think we’re dealing with this situation in a prudent and responsible way.

We’re not at all claiming that the housing downturn is mostly done. On the contrary, we’re assuming that house prices have fallen about one-third as far as they’re going to go peak to trough. That may seem pretty cautious or even pessimistic but I think cautious is exactly where you ought to want us to be right now. For all these reasons, we believe that we will come out of the downturn in a strong, successful form as a competitor and in a sector whose longer term demographic and growth prospects remain very good. Now, we’re very eager to take your questions, thank you for listening and we’ll open it up to questions.

Question-and-Answer Session

Operator

And once again ladies and gentlemen if you would like to ask a question please press the star then one on your touchtone phone, you’ll hear a tone indicating you’ve been placed in queue. If your question gets answered or you wish to remove yourself from the queue please press the pound key. And we’ll first go to the line of Kenneth Posner with Morgan Stanley, please go ahead.

Kenneth Posner – Morgan Stanley

Good afternoon and thank you for the disclosures and the adjusted operating income, that’s all great stuff, it’ll take us a while to understand. I have a question about this pesky fair value number which did fall substantially, particularly on a common equity basis for Freddie Mac in the quarter and I wondered if you’d just comment on how you’re valuing the general or the guaranty obligation? If I’ve done the math right, maybe I didn’t, you’re valuing the guaranty obligation at 1.5% of the credit book and your competitor Fannie Mae seems to be valuing it, again if I did the math properly at 75 basis points. How can that be and are these the right numbers?

Patty Cook

Ken thanks for the question. You know I can’t speak to how our competitor values their GO but I can try and be as transparent as possible as to how we do it. And as you noticed in my prepared remarks, we come at that expectation of the present value of future expected default costs in $12-$15 billion range by looking at a median house price decline peak to trough of about 15%, we look at a Monte Carlo simulation around that in terms of trying to estimate what default probabilities would be on that portfolio. And that’s sort of the interesting statistic I think you need to focus on. It suggests about a 3.5% default rate with 25% severity. So you in your own mind need to decide whether or not you think that’s reasonable.

What we do when we go to the market is we go beyond just an assessment of expected default cost with maybe a modest risk premium and actually capture the risk premiums that are in the marketplace in terms of the wider spread on mortgages and mortgage related assets as we ask dealers for a price, for a spread. So the difference between what’s in our fair value balance sheet and our estimate is that different in risk premium, which is as I said in my comments we would expect to earn back over time. One other comment I would make, the other thing that’s significant is to look at the delinquencies. You know currently we have delinquencies of 65 basis points. So again I think you need to look at 65 basis points of delinquencies and you know an expectation of 3.5% defaults get you to the $12-$15 billion then I think you can put the GO that’s on the fair value balance sheet in context.

Kenneth Posner – Morgan Stanley

So it sounds like the difference is in the risk premium, thank you.

Operator

Next question from the line of Paul Miller with Friedman, Billings, Ramsey, please go ahead.

Analyst for Paul Miller – Friedman, Billings, Ramsey

Good afternoon this [unintelligible], Freidman, Billings, Ramsey, on your credit loss forecast for 2008 and 2009 the 12 and 14 basis points, could you talk about your underlying assumptions in terms of would you expect for house price declines nationwide and also on your severity of losses.

Dick Syron

I think we said in housing price declines we expected about another 10% from what we’ve experienced so far.

Patty Cook

And I think the other thing to conclude is that there is a connection between that 12 and 14 basis points over time with the net present value of EDC that we alluded to which is in the 12 to 15.

Analyst for Paul Miller – Friedman, Billings, Ramsey

Just a quick follow up, on the cure rates you’re seeing now on the delinquent loans, could you give us some indication on where this is right now versus where it was in 2005 and 2006.

Buddy Piszel

When we look at the first year cure rates, you know historically you know they were trending about 45% and the first year cure rates on the 07 book, we’ve trended downward a little bit so it’s lagging where we’ve seen historically and we’ll see where that goes in the second year, whether it rebounds or whether it continues.

Operator

Next we’ll go to the line of David Hochstim with Bear Stearns, please go ahead.

David Hochstim – Bear Stearns

Two questions, one is could you just talk about how you would allocate capital between growing the retained portfolio and growing the guaranty business. It seems that returns are very attractive in the guaranty business with higher fees and you have massively wider spreads on a range of mortgages available for purchase, obviously you have some capital constraints but if you combine mortgages for [unintelligible] without having to take additional credit risk, wouldn’t that be a good thing and wouldn’t that have a secondary benefit of causing mortgage spreads to tighten and help solve some of the problems with marks and the balance sheet?

Patty Cook

Good question David, thank you. First of all, ROEs in all three businesses really, the single family business, the retained portfolio and the multifamily business have all improved dramatically since the last time we all spoke. I think when we think about the GC business, you know it is front and center to the core of our mission which is liquidity, stability and affordability and we think with our new price increases we are pricing appropriately for the risk imbedded in that portfolio. It’s off balance sheet. The capital requirement is relatively low.

We’re comfortable that we’re in a position to accommodate 10% growth rate in that business and a similar increase in multifamily. I think on the retained portfolio you know that issue is a little bit harder from two perspectives. First of all, it uses more capital than the other two from a regulatory perspective and second, while there are really good opportunities right now in agency mortgages, some of the widening in spreads we’ve seen on the retained portfolio have constricted the origination of agencies and of non agency mortgages, mainly ABSs in a way that they’re not readily available. So I think as we go forward you know we have got to consider and continue to evaluate the opportunity relative to the amount of regulatory capital, relative to the timeliness and the amount of the 30% rollback.

David Hochstim – Bear Stearns

Aren’t there opportunities in the market where you could in fact provide more valuable liquidity by buying I guess pools from other holders or investors? I mean if it’s not new production then there is not liquidity in the market except in the agency securities market and that’s a fundamental part of the problem.

Patty Cook

We are active though in sort of even in bulk space, so away from flow, I mean our bulk purchases last year were probably about $100 billion. So we did a lot of that last year in terms of trying to provide liquidity in non flow space to loans that were on balance sheet. And you know we will continue to do that where we see mortgages that are consistent with sort of our charter, that are in the conventional conforming space.

Buddy Piszel

But David, you know one of the things that, the way we’re approaching the business is we’re going to be a little cautious with our capital at the beginning of the year. We have the amount of capital that will allow us to manage the growth in the GP business and be careful with the growth in the retained portfolio because we want to see where credit goes. So we’re actually deploying capital on a fairly prudent basis as we got out of the blocks early in the year.

David Hochstim – Bear Stearns

Okay and then could you just clarify Patty what you said about the increase in fees, delivery fees and guaranty fees that the increased the 30 basis points, does that include the delivery fee amortized over the life of the security or are you going to take any of those up front or just enough to manage the loss on originations?

Patty Cook

I’m not sure I fully understand your question, the fee increases were a combination of delivery, they were in delivery fees as opposed to in core guaranty fee.

David Hochstim – Bear Stearns

Does that mean you raised guaranty fees also for certain types of product?

Patty Cook

Yes.

David Hochstim – Bear Stearns

Okay so you mentioned an increase for the beginning of the second quarter I guess?

Patty Cook

Yes [overlay]. In that target is the amortization of delivery fees, they are not taken up front.

David Hochstim – Bear Stearns

Okay and would you be taking some of them up front to offset the loss that you’ve been booking every time you create a security?

Buddy Piszel

No, our accounting David requires us to amortize that so it comes in on an amortizing [len], we think about the economics of negotiating or transacting a fee, we think about it on an amortized basis, even though the cash comes in the door right away.

David Hochstim – Bear Stearns

Okay, thanks.

Operator

Our next question is from the line of Brad Ball with Citi, please go ahead.

Brad Ball – Citi

Thanks Buddy I appreciate given the time constraints that you don’t want to delve too far into AOI, but I’m wondering if you could give us some high level views on what you’re accomplishing with AOI. If you look at your presentation it looks like the bottom line differences between your AOI earnings and your GAAP earnings are substantial, it looks like a $5 billion differential. You know, just at a glance it looks like your essentially eliminating from adjusted operating income all the stuff that’s bad and keeping all the stuff that’s good. So if you could clarify if that’s actually the case. But it really does look like what you’re doing is recognizing in AOI the things that are in your business that are not economically hedged and basically amortizing the things that are. Could you give us just at least some color on that, thanks.

Buddy Piszel

Yeah I mean this all goes to the timing of when we implemented this and the presentation years that we’re giving you. If you go back, because the way we apply this Brad, went all the way back to 2001 and in those earlier years, the results are negative compared to what we reported and then as you get closer to the 06 and 07 timeframes, you know I think 06 is about a push and 07 gets better. So we committed to do this back in November of 06 when the market had not melted down so the objective was not to make the results look better, the objective was to make the results clearer. I would take exception to the point that we’re amortizing only certain items.

We’re looking at items that just from an immersion standpoint drop into a quarter represent a cumulative effect of an approach to the portfolio that really is thought about a long term basis and then amortizing that over its intended timeframe. So I think you’ll see when we go through a better and more extended discussion of what we’re trying to accomplish here, we basically look at both of these business as accrual based emergence of earnings. The current GAAP framework creates a lot of marks that either accelerates forward or pushes out maybe on an inappropriate timeframe the recognition of the emergence of those earnings and what we’ve tried to do is create a way so that accrual based earnings would emerge from both of the business. To us that makes some sense, when you guys get into it you can make your own calls but we find it useful in looking at the periodic performance of the business.

Brad Ball – Citi

Okay that’s very helpful, just as a follow up, have you run this approach by your regulators, either passed OFHEO or the SEC and what have their impressions been and could we hope that at some point, maybe down the road, we could use the AOI income as the basis for establishing AOI or AOE, adjusted operating equity and that maybe regulatory capital will come off of that as a base as opposed to GAAP equity which is obviously skewed by the volatility in GAAP earnings.

Buddy Piszel

Yeah, first we have run this presentation by the SEC to make sure that they didn’t take exception to either the concept or the disclosure that we’ve provided in the ISS because this will be included in the annual report that we used to start registration. And secondly we’ve shared it with OFHEO. I think it’s premature to even imply how it will be utilized by our regulator for purposes of capital and quite frankly we’re looking at it more from an emergence of earnings than as a capital management tool at this point.

Brad Ball – Citi

Okay, thanks.

Operator

Our next question comes from the line of Howard Shapiro with FPK, please go ahead.

Howard Shapiro – FPK

Hi, thank you very much, one question for Buddy and one question for Dick if I could. Buddy, on slide number 4, GAAP financial results in the slide pack you line item number 3, can you talk to us about how much of that volatility or how much of that Q4 loss would have been eliminated by the prospective adoption of FAS 159? As I understand it, that was not a component in reducing the mark to market in fourth quarter.

Buddy Piszel

That’s true and you know the difficulty with trying to give a sensitivity to where rates move when you put your hedges in place is that it changes as the market conditions change so from the beginning of 07 until the end of 07 to the first quarter of 08, the sensitivity is to interest rates change. They are at this point less than half of what they were in 2007 and that’s only giving effect to the GA and if we continue to implement hedge account, we would hope to limit that exposure even further.

Howard Shapiro – FPK

Okay, less than half sounds pretty significant, is that correct?

Buddy Piszel

Yes.

Howard Shapiro – FPK

And then Dick can I just ask you a question on the 30% OFHEA surcharge? What is the legal or regulatory right of OFHEA to keep the surplus in place at this point now that you’re current?

Dick Syron

Well I think the legal or regulatory right comes around to, we have a voluntary agreement with [overlay], this meeting certain elements of these agreements and material weaknesses would be a consideration. While it’s not explicit in it I would expect where we are with SEC registration would be a consideration and then we have some what I would call mechanical issues, such as the exact timing of the separation of the Chairman and CEO.

Howard Shapiro – FPK

Okay and once you resolve some of these mechanical issues and SEC registration, do they have any rights, considering it’s a voluntary agreement, to mandate a continued 30% surcharge?

Dick Syron

Well I should be clear on some of this, we agree to it so I suppose it’s to be a voluntariness is debatable. But you know to answer your question directly, we think OFHEO has taken the right steps by removing the caps obviously on the portfolio and by raising the question that it’s looking at the 30%. We think that’s the right approach to take actually for the US economy and the US housing market because I think as was noted earlier in the conversation, the more that we’re able to do in some of these markets, the better, [it’s not right], it’s going to be for the economy so I think OFHEO is approaching it in the right way.

At the same time they’re trying to balance I think the current kind of credit conditions and be sure that we have sufficient capital. I will tell you as an institution, in the environment that we’re in, we’re treating capital a little bit like a scuba diver treats oxygen. I mean we look at it as very important and we’re being very cautious on how we approach things independent of OFHEO’s approach.

Howard Shapiro – FPK

Fair enough, thank you very much.

Operator

Our next question is from Eric Wasserstrom with UBS, please go ahead.

Eric Wasserstrom – UBS

Thanks very much, if I could just follow up on the question of capital, on slide 2 you have the pro forma as of January 1st. As I think about what spread behavior has done between then and today, February 28th, it would suggest that actually the existing capital too would be much lower than that 4.5, is that not correct?

Buddy Piszel

That’s actually not correct. By virtue of what we’ve done with the GA, we’ve muted some of that downgrade pressure and actually the way the portfolio is positioned, we actually do much better in a steeper yield curve environment so the steepening has actually helped us. So coming out of the blocks as we sit here today we’re ahead of the game to some degree. Now we’ve seen how fleeting this can be so we’re not banking that. But we’re certainly in a better position today than we were on 1/1.

Eric Wasserstrom – UBS

Okay so if I could just repeat that back to you, basically the benefit of the steepening on the yield curve on interest spread has offset the pressure that would result from credit spread or trading spread.

Buddy Piszel

Yes.

Eric Wasserstrom – UBS

Okay and then just in terms of the loss expectations, could you talk a little bit about the expectation for reserves and whether more is needed as you look across your delinquency pipeline.

Buddy Piszel

Well when you think about [more is leading], GAAP is not providing for the reserves through the end of time. Our reserves cover right now about a year and a half’s worth of expected losses. The way those that we’ve laid out what the charge offs are going to be net of recoveries, you can see 08 is $1.7 billion, it goes up to $2.2 in 2010, pretty much the way we’ve modeled it so far plateaus so from a provisioning standpoint I would, our estimate would be that 08 should be the high point for provisioning and then it’ll start to come down on the other side.

If you just think about that we’re providing for a forward look of about a year and a half or so, that’s the way that that would work. So you’re not going to see a quick reduction in provisioning, you’re not, as long as we’re seeing this trend, but you know the one thing I could caution everyone is that it’s still very early in seeing what the real charge offs are going to be. Just look at the ramp from 07 to 08 to 09. That’s a lot of uncertainty and it could break either way for us. So we’ll have to sort of take this with a quarter at a time and we’ll see where it goes.

Eric Wasserstrom – UBS

Gotcha so in other words, let me just make sure I understand you correctly, you would expect your loss experience to be plateauing somewhere around 2010 but the peak of provisioning could be this year?

Buddy Piszel

Yes.

Eric Wasserstrom – UBS

Okay, thanks very much.

Operator

Our next question is from the line of Moshe Orenbuch with Credit Suisse, please go ahead.

Moshe Orenbuch – Credit Suisse

Great, thanks. Could you Buddy maybe talk a little bit about how long it might take to get through the SEC registration process and besides the separation of Chairman and CEO, what other conditions exist within the consent agreement?

Buddy Piszel

Well you know, for all practical purposes Moshe we’ve already started the process, so we’ve engaged the SEC on reviewing the accounting change that we put in, we engaged the SEC in the introduction of our adjusted operating income and our segment determination. So they’re getting some good coverage on us already. Our intention would be with the release of our annual report today, we would immediately start the process on a pre-clearing process for them to go through our entire annual report disclosures that would be the basis, the foundation upon which we go though the registration process.

Once we get the feedback on that and that’s, you can’t really judge how long that’s going to take, then the literal process we go through is literally you submit a form 10 and 60 days from that submission, you’re an effective SEC registrant. So it’s really the time that will take for us to engage the SEC, get their feedback on our reporting and our disclosures and then start the process. So it’s not as long and tortuous as some might think.

Moshe Orenbuch – Credit Suisse

But 3-4 months would seem reasonable?

Buddy Piszel

We’ve said that we wanted to start the process you know by midyear, 3-4 months would be about in that time frame and then 60 days from that time frame we will be an SEC registrant.

Moshe Orenbuch – Credit Suisse

Great just a quick follow up. An earlier questioner asked whether your new non GAAP measure would be used kind of for regulatory capital. About three weeks ago the Chair of OFHEO actually used your current non GAAP measure as part of a capital metric and I’m just wondering, is that realistic? Does OFHEO look and how do they use that fair value in the capital process?

Dick Syron

Under the law, our capital is determined by GAAP. We follow GAAP regulations in a number of areas. It’s statutorily specified, so GAAP is the relevant measure.

Moshe Orenbuch – Credit Suisse

I understand that, you did however at the Congressional testimony use some slides that included leverage measured on a fair value basis.

Buddy Piszel

Yeah Moshe I mean we provide information to OFHEO and we use it internally to look at fair value as Patty discussed and we also have our own economic capital frameworks that gear off of fair value, they’re not fair value on a pure unadjusted basis. So you know we share that information with OFHEO, it’s helpful in some respects and they consider it in looking at the overall adequacy of our capital.

Moshe Orenbuch – Credit Suisse

Okay thanks.

Operator

Next to the line of Bruce Harting with Lehman Brothers, please go ahead.

Bruce Harting – Lehman Brothers

Hi, on the adjusted operating income, I’m just wondering, the investments have the largest contribution from net interest income but not any provisioning for credit cost associated with them. The single family business has the credit costs, less interest income. How are you picking up interest income versus guaranty and other and what are the separations you’re making there and then another question would be if you do go back to hedge accounting for GAAP purposes, can you just remind us of some of the issues regarding effectiveness and you know what will be different from say a couple of years ago before you discontinued hedge accounting just in terms of potential pitfalls or going back to that, thanks.

Buddy Piszel

Sure, Bruce as far as the way investment income is allocated across the segments, the amount of investment income that’s in credit in the guaranty segment is really driven by the amount of capital that’s supporting the segment and the free funds associated with that capital. So that’s why there’s investment income in there and then the balance of the investment income is really the net spread generated by the retained portfolio plus the capital supporting the retained portfolio business.

That’s the way we set it up. On the hedge accounting, we’re actually going to enter into our first hedge next week. And we’re keeping this very simple and straightforward. We’ve learned a lot of lessons from the past in the ways not to do this and we are very, very diligent and we’ve already had external reviews of the adequacy of documentation, the nature of the hedges that we’re going to enter into will by their nature be extremely effective and we are going to be very, very diligent to make sure we’re complying with all aspects of GAAP. And we’re going to go into this slowly. So we’re not going to in one shot lay in massively extensive or complicated hedges. We’re going to walk before we run and move into this gradually with a lot of oversight.

Bruce Harting – Lehman Brothers

And in terms of net interest income, one last one Buddy, what can we foresee? I mean on the last quarterly conference call I think you highlighted you know a bottoming in the net interest margin on both the GAAP and perhaps on an adjusted basis. Anything you can comment about cost of funds versus the widening you know you’re seeing on the asset side and you know also following up I think on David’s earlier question about the tradeoff between MBS and on balance sheet. Is there anything you can say to us about how we should be modeling 08 09 for how much jumbo you might be putting on the balance sheet at those higher spreads and you know the re-mixing of the assets. Thanks.

Buddy Piszel

Yeah Bruce I would prefer to deal with 08 expectations at our investor day. First of all, that’ll give us something to talk about. But there are some things that are going on in NIM, you know if you think about it we’ve put on business for a couple years in a relatively flat yield curve environment. As that moves forward you don’t, the new business is at a wider, because with the steepening of the yield curve you’re getting a little benefit for new business. So there’s a couple elements that have to be considered before you think about directional. And then on the question around jumbos, I didn’t quite get your question.

Patty Cook

I think the issue as it relates to jumbo would be first of all whether it’s on or off balance sheet. Right I think the suggestion you were maybe making is that if we bought jumbo and it was on balance sheet, how would that contribute to NIM and if the spreads were wider it would have a positive impact on NIM. I think just to echo what Buddy was saying, I mean the key difference is that the nuance of a yield curve effects NIM which is absent when we think of economic margins. You know the economic margin on these transactions is clearly wider than it has been in some time, but because of the way it’s recognized in GAAP, the effect of the yield curve is not giving that transparency.

Buddy Piszel

Right and Bruce just one last point there, while we’ve made a lot of adjustments in adjusted operating income, we decided it would be impossible to try to adjust out the early spread advantage you get in GAAP versus you get on an OAS basis. So we didn’t try to do that, so it will have an impact on the way that trends.

Bruce Harting – Lehman Brothers

Thanks, just a clarification, when we look back a year from now will the jumbo opportunity be mostly one that you put in the MBS pools or you know partly on balance sheet or mostly on balance sheet? And that’s it.

Patty Cook

You know Bruce, right now we haven’t come to that decision. When you look at jumbos, theoretically there were three options. One, it could have gone into TBA but [unintelligible] as of right now is saying it’s not good delivery. We could choose to securitize it in its own security or we could put it on balance sheet. And I think it’s going to depend on the size of the opportunity, where the securitization of jumbos would actually trade. So at this point, we haven’t made that decision. The other thing that we don’t know for sure is the MSAs that are going to be eligible and therefore the size of the opportunity at this point is also a bit unclear.

Bruce Harting – Lehman Brothers

Thank you.

Operator

Our next question comes from the line of Robert Lacoursiere of Banc of America Securities, please go ahead.

Robert Lacoursiere – Banc of America Securities

Great, thank you, wonder if you could discuss a little bit about the implications of New York Attorney General’s lawsuit against First American in that there may be perhaps widespread problems in terms of appraisals. Have you, what will you be doing to review the loans that you have purchased to, I imagine you a rep in warranty issue that you could put these loans back to the original seller if you find that they were inaccurate in terms of their appraisals. And in that, could you also ask, could you give, a disclose if you actually are, have been and what level of request for repurchases? That you’re requesting somebody else buy it back from the pool?

Dick Syron

Well one, our level of request of repurchases I believe has gone up. Two, we do have reps in warranties that we could use. Three, we have increased the resources and efforts that we’re putting towards quality control and looking at things. And four, not surprising you, I can’t comment at all about our discussions with the New York Attorney General.

Robert Lacoursiere – Banc of America Securities

Could you put some meat around what [unintelligible] increasing your repurchases, like could you give us any numbers whatsoever?

Patty Cook

Hang on. A couple things on repurchases. Clearly as you might expect they are going up and we’ve taken a variety of actions that all relate around sort of adding staff so that we are able to review more loans than we’ve reviewed in the past. So we would expect the repurchase activity somewhere to within REO. Our efforts around modifications to be enhanced during this time period.

Robert Lacoursiere – Banc of America Securities

If I could bother with a small follow up on that. If you do result in a substantial increase of repurchases, how do you, would you also deal with it that there would be a loss sharing agreement other than asking them to repurchase it?

Dick Syron

You know with all due respect you’re getting into complex questions that deal with legal issues that deal with how we interact with specific customers and how we also, it’s perfectly reasonable for you to try getting an answer to the question, where we stand with Attorney General Cuomo, but it’s really not appropriate for us to say anymore than we’ve said.

Robert Lacoursiere – Banc of America Securities

Great, thank you.

Operator

Next question is from Fred Cannon with KBW, please go ahead.

Fred Cannon – KBW

Thanks, just going back to some of the earlier statements I wanted to square your discussion on credit losses. I believe Patty said that on the GO that you’re assuming 3.5% default and 25% severity which suggests and 87.5 basis point cumulative loss. When you’re on your slide where you showed the expected credit losses in 08 and 09 you’d have 12 basis points in 08 and 14 in 09, I’m wondering is that 87.5 basis points going to be consistent with your expectations for annual losses moving forward?

Buddy Piszel

Yeah, these things do square. Included in Patty’s number are three things, one are charge offs, two is REO expense and three is lost interest. What’s represented on the slides are just the charge offs and the lost interest and then there’s a present value, future value disconnect between the two but they all do add together and they do reconcile.

Fred Cannon – KBW

Okay thank you.

Ed Golding

Operator can we please have one more question?

Operator

Absolutely and that will be from the line of Thomas Mitchell with Miller Tabak, please go ahead.

Thomas Mitchell – Miller Tabak

I guess the larger question I have is looking at your overall book of business and looking at how much trouble the American homeowner appears to have gotten themselves into or has been pushed into, it’s hard to reconcile in a way your mandate or you know your fulfillment of your mission with, how much people seem to need and how little the Federal government is doing and essentially the kind of [gross] rates you said. Can you address why you think that we’re going to get out of this without a whole lot more help than we’ve had please?

Dick Syron

Well, I’m not running for anything but look I mean I think we had a situation clearly where we did have a bubble in the housing market, that’s why we’re seeing these corrections not generated by exogenous economic factors outside of housing. I think we probably were a little too aggressive in our ambitions on homeownership overall and affordable homeownership.

But if you look at this over the longer run, there is growth in population, there’s growth in immigration, Americans basically like to live indoors and there is going to be in the longer term a growth of demand for housing once we get through this correction. And the final point is I would say that one thing that this sure has demonstrated to me and I think is increasingly demonstrated to a lot of other people is the importance of having institutions such as the GSEs that provide what stabilization there is. This is a very ugly situation we’re in in the United States housing market now. I would not want to contemplate how much more ugly it would be if there were not GSEs.

Thomas Mitchell – Miller Tabak

That’s a good point. The other question I had was on this fair value $14 billion or whatever it was in the fourth quarter, I think I’m close on that and the question is, what would it take to move that from essentially an observation to having to take a mark down? What would be the threshold on that?

Patty Cook

The change would be our expectations that losses are probable. So if the housing market were to deteriorate significantly from here so that you could begin to contemplate 50% defaults and 50% severities or 60% default and 50% severities, then we might be in a position to consider some impairments. But even at that level the realized losses are modest. So it’s really how if it becomes more likely that those scenarios are realized and right now we’re a long way away from those.

Dick Syron

Well this is Dick Syron I just want to rush things to a close to say you know we’ve taken an hour and 15 minutes of your time during a day that probably a lot of things are going on. We hope we’ve presented rather clearly and hopefully with great transparency what’s going on with us. These are complicated issues. There were a number of good questions and we look forward to seeing many of you in New York at our investor day on March 12th when we can get into these things in an even greater detail if you’d like. So thank you very much for your patience and your interest.

Ed Golding

Thank you, that concludes our call, operator can you please tell about the replay number? Thanks.

Operator

Certainly and ladies and gentlemen this replay starts today at 3:30 PM Eastern and will last until March 13th at Midnight. You may access the replay at any time by dialing 1-800-475-6701, international parties please dial 320-365-3844. The access code is 909706. [Repeating numbers]. That does conclude your conference for today, thank you for your participation, you may now disconnect.

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